Daily Fantasy Sports & Modern Regulation

By: Alex Karl

American consumer markets are always seeking to develop new cutting edge ways to make money. One ever-present revenue goliath is the sports industry, which generates roughly $14.3 billion annually.[1] With every industry there are others who try to latch on and make a profit of their own, and this is no different with the sports industry and Daily Fantasy Sports (DFS) sites. DFS websites such as FanDuel and DraftKings hone into this market by allowing it’s users to enter into contests where they create lineups from athletes in their respective sports in an attempt to win money.[2] The sites offer contests on a range of sports, including the NFL, NBA, MLB, PGA and more.[3] After choosing a contest you wish to join and paying a fee, users are allotted a set budget in which to create their lineup and each respective athlete is given a salary cost which when chosen detracts from your budget.[4] The athletes salaries are determined by their past performances, and a projection for how well they will do in this contest.[5] When the athletes are performing they are given points based on their statistics (I.E. touchdowns, baskets made, homeruns).[6] After the points are assigned, the owners whose lineups performed the best are the winners, and are given a cash payout.[7] Overall DFS is a spin-off of traditional fantasy sports which require year-long commitments to players by allowing owners to enter as many contests as they wish, and create new lineups each time. DFS websites make money from their users by taking a 10 percent cut of entry fees: fees which can range from $.25 to $10,600.[8] The DFS branch of the sports market is booming, and users will spend roughly $3billion in entry fees this year.[9] However while expansion has been rapid, some states such as New York are trying to shut down the websites.[10] In New York the attorney general has sent cease-and-desist letters to both FanDuel and DraftKings by claiming they constitute illegal gambling, and is seeking a preliminary injunction during a lawsuit on the sites.[11] My goal in this piece is to outline the attorney general’s argument against DFS websites, contrast DFS to other gambling allowed within the state, and suggest how states can handle DFS moving forward.

On November 17th, 2015 the New York attorney general wrote a memorandum of law which supports his argument for a preliminary injunction in the lawsuit against DFS. First, the attorney general highlights federal law that defines a bet or wager in terms of illegal gambling. A bet or wager can be defined as “the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance”.[12] The key takeaway from this federal statue is that an outcome must be subject to chance, as this is the whole basis of the attorney generals argument. In his memorandum he argues the fees paid are bets, and the outcome of the contests depend on a “material degree” of chance.[13] He sites many factors that are out of the DFS player’s control, such as athlete injury, which determine the outcome of the contests.[14] Next he moves on to discuss the wagers in relation to unlawful internet gambling, which means “to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the internet where such bet or wager is unlawful under any applicable federal or state law”.[15] The attorney general claims the sites constitute gambling by this definition and in violation of the Unlawful Internet Gambling Enforcement Act. However, FanDuel and DraftKings have countered by claiming they are exempt because of three provisions within the statute. The provisions state “(1) Payouts are made clear to users before the game takes place, and the number of users does not determine the payout. (2) Winning reflects “the relative knowledge and skill of the participants and are determined predominantly” by the accumulated statistics of individuals across “multiple” sporting events. (3) Users can’t win prizes as a result of the performance of a team as a whole (say, the entire San Diego Chargers), the outcome of a game or the performance of a “single” individual athlete.”. [16] Despite the sites claiming they satisfy these conditions, the State is strongly holding that the contests are games of chance, and thus illegal. In order to give some backing to their argument, and identify harm aimed to be prevented, the State highlights the prevalence of gambling addiction. The attorney general claims there has been an increased amount of people claiming to be addicted to DFS at Gamblers Anonymous meetings, and meeting with counselors.[17] Also, the memo discusses how DraftKings has received numerous inquiries to their customer service representatives, citing gambling addictions in an effort to shut down their accounts.[18] While it is obvious gambling addiction is a significant harm to many people’s lives, and one which the State can cite public health and safety rational for an injunction, their argument seems somewhat week in my opinion because of the other available means in which one can legally gamble.

Currently in New York the Gaming Commission recognizes the lottery, horse racing, video gaming terminals, electronic gaming terminals, and casinos as legal means of gambling.[19] These means are readily available statewide and depending on the service allow anyone over the age of either 18 or 21 to gamble legally. While the attorney general cites an increased gambling addiction concern from DFS websites, he fails to acknowledge the other means available for people to get their gambling fix. Being addicted to something is a disease, and true addicts will always find alternative means to satisfy their desire. While it cannot be overlooked that the availability of the internet and DFS websites create means of gambling which are now easily accessible, it still does not negate how many opportunities the State allows for its citizens to gamble on a daily basis. Currently, there are 8 horse racing tracks within New York.[20] In addition to this, there are 5 legal Off Track Betting facilities which allow for individuals to sit and bet on horse races all across the nation.[21] Horse racing, by using the attorney generals definition from his memorandum, is a game of chance. After a bet is placed the outcome is directly subjected to a “material degree” of chance as a horse could get injured, or not perform up to par. Even if the attorney general were to claim these facilities are not as readily available as logging onto the internet, one can still play the most readily available game of chance; the lottery. Any individual who is 18 can walk to the nearest convenience store and buy a scratch off. This is no different than navigating the internet to set a lineup, and DFS takes more skill than using a lucky penny. While the argument I am presenting for DFS is somewhat of a fallacy because I am not claiming DFS does not include a “material degree” of chance, but rather painting the attorney generals claims as hypocritical, I still think it brings to light a potential resolution. The State is clearly not opposed to gambling, as it has promoted other legal forms. However, one thing that all the legal forms of gambling have in common is they are heavily regulated by the state.

New York State currently has the second highest debt in the nation with $141.4Billion.[22] The State should be looking for any opportunity to take a bite out of the debt. Allowing DFS to exist but taxing its revenue would be mutually beneficial. Last year after paying out prize money, New York made roughly $2.9billion from lottery regulation.[23] While the lottery may be a larger source of State revenue than DFS can be, taxing these sites would still bring in a large sum of money. New York makes up a large portion of DFS users, as it is roughly 7 percent of DraftKings user base and 5 percent of FanDuel’s.[24] It would behoove the State to take advantage of this opportunity and implement a system similar to the one it uses to tax horse racing. Currently, depending on the bet type, the State takes a set percentage ranging from 15 to 25 percent of each wager placed on a horse race.[25] In handling DFS, the State should take a set percentage from each fee paid by the users of the site, and use the revenue to either help pay off State debt, or give funding to other areas in need. The attorney general attempting to stop DFS by claiming they are gambling, and citing gambling addiction reasons is nonsensical. While I have not gotten into whether or not these sites constitute gambling by the legal definition laid out from the state, I will argue the State is promoting a false cause at the expense of an opportunity to increase State revenue. Ultimately, DFS and the State can coexist in the realm of legal gambling, and it would be extremely lucrative for both.